A good problem to have

In the U.S. energy markets right now, it is hard to find companies that are not doing well. The energy renaissance brought on by shale fracking has brought with it a tsunami of activity for operators and service companies alike. Profits of the largest oil and gas companies are way up as they shift from acquisition of acreage to production in shale areas. The U.S. is now the largest producer of oil in the world. From 2011 to March of this year, U.S. oil output increased 1.8 million barrels per day (mbpd) to 8.2 mbpd with 96 percent of this increase coming from shale. (More good news: Natural gas pricing is rebounding from the dip in 2012, causing independents to increase their activity in fields previously idled in favor of oil plays. Chesapeake Energy recently announced major plans for entering the Utica Shale in Ohio and that it would return to the gas-rich Haynesville Shale in Northwestern Louisiana and East Texas.)

As drilling companies tap shale formations across the U.S., so much oil is flooding out of the ground that prices for ultra-light oil have fallen as much as $10 or more below the price of traditional crude. The oil refineries that process this shale oil, commonly referred to as condensate, into end products like gasoline and diesel can’t take it fast enough. As a result, the market is acting to correct itself, as it naturally does. Nearly 20 refining projects with a capacity of more than 900,000 bpd are in various stages of development, according to Credit Suisse Group.

Under rules imposed after the Arab oil embargo of the 1970s, U.S. companies are not allowed to export unprocessed oil, or crude. U.S. companies may however export refined fuel such as gasoline or diesel. This 39-year-old ban was implemented in a time of crisis, when gasoline prices quadrupled when our major suppliers cut us off as political pressure to shape our foreign policy. Today, the shale gale has obviously changed the playing field and the American Petroleum Institute and others would like to see the ban repealed. In Congress, most notably, Sen. Lisa Murkowski (R-Alaska) has been a vocal proponent of lifting the ban. If the ban were lifted, exploration and production companies would surely gain from better pricing on their products. As a result, producers have lobbied aggressively to relax the export ban, saying they could get a higher price from foreign buyers than from U.S. refiners.

Even though we have been producing so much oil as a country, changing the rule is a tough sell in many circles as oil prices are stuck above $100/barrel, and gas at the pump is still well above where it was before the surge of production. Many can reasonably argue Americans will benefit from lower fuel prices if the government maintains the longtime export ban. Also, many refineries making millions and billions in capital investments to process U.S.-produced light condensate instead of Canadian or South American heavy crude have relied upon the ban in their calculus. Further, general manufacturing has made a significant rebound in the U.S. as new investments are being made in everything from steel factories to fertilizer plants based upon cheap shale production.

Recently two private orders were issued by the Obama Administration that seem to soften the ban. The Commerce Department’s Bureau of Industry and Security issued two separate rulings that gave Pioneer Natural Resources and Enterprise Products Partners permission to ship condensate to foreign buyers. The condensate under these rulings qualifies as a product suitable for export if it has been stabilized and distilled. Most condensate is stabilized, which is a longstanding process to boil off some of the most volatile gases. Distillation is an additional step, separating the condensate into different streams, but far short of turning the condensate into finished fuels.

According to the Commerce Department, there has been no change in the policy on crude exports.

“Consistent with the regulatory definition, crude oil that has been processed in a distillation tower which results in the crude becoming a petroleum product is no longer defined as crude oil,” said Jim Hock, Commerce spokesman. “Petroleum product can be exported … .” These rulings of interpretation are of no small effect as it is estimated 1 million of the 8.2 million barrels of oil produced daily are condensate.

The exporting of crude is an issue of which I can easily see both sides. The government’s allowing distilled condensate to be exported is a convenient and statutory way to split the baby as I see it. But at least we are blessed with this problem of an abundance of oil and better energy security.